A FINRA Arbitration Panel awarded a public customer $286,000 against the husband and wife registered representatives who had serviced his account; however, the arbitrators did not render an award against the couple's employers. On appeal, the customer argued that under the doctrine of respondeat superior, the misconduct of the the husband and wife should also be attributable to their employers. In contrast, the employer firms argued that they did not, in fact, know that their employees had engaged in misconduct, and that any alleged misconduct had taken place outside the "scope of employment."

At the hearing, Claimant requested compensatory damages in the amount of $144,000.00 of which Respondents Concorde, Kavanaugh, Levy and Mallory should be jointly and severally with Respondents Westminster Financial and Respondent Westminster Advisory in the amount of $60,000.00, plus lost opportunity damages of $374,400, as well as punitive damages against each Respondent of $200,000.00 to $300,000.00.

Respondents Concorde, Kavanaugh, Levy, Mallory, Westminster Financial, and Westminster Advisory generally denied the allegations and asserted various affirmative defenses. Respondent Richard Cody and Jill Cody did not submit an Answer or Uniform Submission Agreement, and they did not appear at the hearing. As set forth in part in the FINRA Arbitration Decision:

On August 1, 2018, Claimant filed a Motion to Dismiss Respondents Kavanaugh, Levy, and Mallory without prejudice pursuant to FINRA Rule 12700. Respondents Kavanaugh, Levy, and Mallory joined in the motion. By Order dated August 16, 2018, the Panel granted Claimant's motion.

FINRA Arbitration Award

The FINRA Arbitration Panel found Respondent Grant Cody and Jill Cody jointly and severally liable to and ordered them to pay to Claimant Ebbe $286,096 in compensatory damages. Further, the Panel denied Claimant's claims against Respondent Concorde, Westminster Financial, and Westminster Advisory.

worked for Verizon from 1969 until he accepted an early retirement in 2002. Upon retirement, he cashed out the entirety of his pension and 401k, a total of $498,000. He hired Richard Cody, an investment professional at Leerink Swann who was recommended by a friend and former colleague at Verizon, to manage the money. Ebbe maintained his investments with Cody after Cody moved to GunnAllen Financial in 2005.

Starting in 2002, Ebbe received monthly distributions from his account of around $3,000 after tax withholding. Once he began receiving Social Security benefits in 2009, he reduced his distributions to around $2,500 per month. He also made withdrawals totaling approximately $22,000 for one-time expenses.

Throughout their relationship, Ebbe and Cody met a few times a year for an account review. During these reviews, Cody told Ebbe his investments were holding their value at around $500,000 and that he was only withdrawing interest from his account. In reality, Ebbe's account principal steadily declined while Cody was advising him. Although Ebbe received periodic account statements from Cody's employers with accurate information about his account value, he did not understand them and told Cody he was relying on him to provide an accurate picture of his financial situation. Cody told Ebbe that these account statements did not include all of his investments.

On January 11, 2008, FINRA's Department of Enforcement suspended Cody for a year and imposed a fine for failing to recommend suitable investments to his clients and providing them with misleading monthly statements. Cody v. SEC, 693 F.3d 251, 256-57 (1st Cir. 2012). Ebbe did not know about these penalties until late 2016.

Ebbe and Jill Cody

As further detailed in the DMA Memorandum, Richard Cody began working for Westminster in 2010, at which time Ebbe's transferred account was worth about $144,000. In January 2013, when Richard Cody moved Ebbe's account to Concorde, the value was about $59,000. As noted in the DMA Memorandum, in January 2013:

[C]ody began his one-year FINRA suspension the same month, so Jill Cody, his wife and also a new investment professional at Concorde, took over management of his accounts, including Ebbe's. Since Concorde knew Jill Cody was managing her husband's accounts during the suspension, the company investigated to ensure she was qualified to do so and conducted a surprise inspection of her office. Concorde found no issues with her management of her husband's accounts and received no complaints from clients.

Despite his suspension, Richard Cody communicated with Ebbe about his investments throughout 2013, and they met multiple times during the year. Cody formally joined Concorde once his suspension ended in February 2014. Nevertheless, Jill Cody continued as the listed investment professional on Ebbe's account during the entire period it was managed by Concorde. Ebbe was unaware Jill Cody was his listed investment professional, although the periodic statements he received from Concorde included her name. Ebbe only spoke with Jill Cody once, when she answered the telephone on behalf of her husband.

During this period, Richard Cody produced a number of false documents that inflated the value of Ebbe's account. For example, he gave Ebbe a false 1099 tax form for the year 2015. In the spring of 2016, Cody visited Ebbe at his home and showed him the top corner of a piece of paper in his briefcase listing an account value of around $489,000. Ebbe requested a copy of the document, but Cody never gave it to him. The actual value of Ebbe's account at this time was less than $100.

In 2015, Concorde received an unrelated complaint about the Codys that triggered an investigation of their business. Concorde discovered that Richard Cody had contacted clients during his suspension and that Jill Cody likely knew about it and did not report it. Concorde terminated the Codys in July 2016. In September 2016, after receiving a late distribution from his account, Ebbe called Concorde and was informed his account value was $0.

Manifest Disregard and Respondeat Superior

At this point, Ebbe filed his FINRA Arbitration. As noted in the DMA Memorandum, Ebbe:

asks the Court to confirm the award of $286,096.00 against the Codys and vacate the denial of relief against Westminster and Concorde. Ebbe argues that the arbitrators acted in manifest disregard of the law when they declined to find Westminster and Concorde liable for the Codys' misconduct under the doctrine of respondeat superior. Westminster and Concorde oppose Ebbe's motion to vacate and cross-move to confirm the award. Jill Cody filed a pro se answer stating that she did not know about the arbitration until she received notice of Ebbe's motion in February 2019. Richard Cody has not responded to Ebbe's motion.

Ultimately, DMA confirmed Ebbe's Motion to Confirm as against Richard Cody and Jill Cody, but denied his Motion to Vacate as against Concorde and Westminster. Further, the Court denied Jill Cody's Motion to Vacate but allowed Concorde and Westminster's Motion to Confirm. In issuing its dispositve orders, DMA found that the FINRA arbitrators had not acted in manifest disregard of the law. As to the Panel's failure to find Westminster vicariously liable for Cody's misconduct, the Court explained in part that:

However, as Ebbe conceded at the hearing, one plausible explanation of the award is that the panel found that Cody did not engage in misconduct while employed at Westminster. The $286,096 award is approximately the value of Ebbe's account when Cody transferred it to Concorde, plus the $1,200 per week Ebbe sought as lost income for the period during which his account was with Concorde. This calculation, along with the fact that the panel held Jill Cody jointly and severally liable with Richard Cody even though she did not work at Westminster, suggests the panel determined that Richard Cody only engaged in misconduct while at Concorde, where Jill Cody also worked.

In reaching this result, the panel may have concluded that Ebbe presented insufficient evidence of Cody's misconduct while at Westminster. Ebbe relied solely on his own testimony about Cody's misrepresentations during this period and presented no corroborating testimony or documentation. The panel likely found this evidence to be insufficient. And with insufficient evidence of Cody's misconduct while at Westminster, the panel could not find Westminster vicariously liable either. See Gifford v. Westwood Lodge Corp., 24 Mass.App.Ct. 920, 507 N.E.2d 1057, 1058 (1987) ("Since the agents were not liable, [the principal] could not be vicariously liable."). This explanation for the panel's award is plausible and colorable. Accordingly, the panel did not act in manifest disregard of the law in denying relief against Westminster.

In addressing Concorde's similar alleged vicarious liability, the Court notes in part that:

For the first year Concorde managed Ebbe's account, Richard Cody served his FINRA suspension and was not even employed by Concorde. Because Cody was not an employee, Concorde cannot be vicariously liable for his misconduct in continuing to manage Ebbe's account during his suspension. Since Concorde employed Cody as an investment professional for the other two years, however, Ebbe presents a strong argument that Concorde is vicariously liable for some of Cody's misrepresentations about his account value. See, e.g., Smith v. Jenkins, 732 F.3d 51, 73 (1st Cir. 2013) (finding sufficient evidence to hold a law firm vicariously liable for the fraudulent real estate closings of its attorney because his "acts as the closing agent were within the purview of his job," the "closings took place at the [firm's] office during regular business hours," and his conduct "was motivated, at least in part, by a desire to serve [the firm's] interests," as the "firm received fees as the closing agent on both transactions").

The panel may, however, have determined that Richard Cody's fraudulent misrepresentations to Ebbe were outside the scope of his employment. Throughout the three-year period Ebbe's account was with Concorde, Jill Cody was designated as Ebbe's investment professional. Concorde never assigned Richard Cody to manage Ebbe's account. It is plausible the panel concluded that Cody's relationship with Ebbe was not part of his duties as a Concorde employee and were therefore outside the scope of his employment. While Ebbe presents a strong argument that Cody was engaged in exactly the type of work he was hired to do when he communicated with Ebbe about his account, the law governing how an employer's delineation of an employee's duties affects whether the employee's conduct is within the scope of employment is not clear. See Potter, 463 F.3d at 26 (recognizing in the context of the similar agency principles at issue in corporate criminal responsibility that there is "a gray area" in which an employer's "restrictions, although not mechanically exculpatory of corporate liability, may well bear upon what is or is not within the scope of the agent's duties").

Though not convincing and perhaps an error of law, this explanation is a colorable justification for the panel's decision. The panel therefore did not act in manifest disregard of the law in declining to apply respondeat superior to hold Concorde vicariously liable for Richard Cody's misconduct.

Finally, in addressing what the Court deemed Ebbe's strongest argument about the FINRA Arbitration Panel's alleged manifest disregard, the Memorandum noted in part that:

[I]t is undisputed that Jill Cody was an employee of Concorde throughout the three years Concorde managed Ebbe's account and that she was Ebbe's listed investment professional for the entire period. Properly managing Ebbe's account was therefore within the scope of her duties as a Concorde employee. She failed to do so by allowing Richard Cody, during and after the period of his suspension, to communicate with and continue to make misrepresentations to Ebbe. Her decision to allow her husband to manage Ebbe's account was motivated at least in part to benefit Concorde through the fees Ebbe was paying. Concorde is therefore vicariously liable for her dereliction of a duty within the scope of her employment. The panel's decision not to hold Concorde vicariously liable was plain error. However, Ebbe has not met the extremely high standard of showing that the panel acted in manifest disregard of the law.

How did DMA get around the facts that Jill Cody was a Concorde employee during the time that he serviced Ebbe's account, and that she wrongly allowed her husband, Richard Cody, to manage the account? Further, what about the fact that Concorde realized fees as a result of the Codys' management (or mismangement) of Ebbe's account? How does DMA reconcile those facts with the FINRA Arbitration Panel's failure to at least find Concorde vicariously liable for the acts of the Codys? Well, the federal court, certainly split a lot of very, very fine hairs, and, as best I understand the DMA Memorandum, the District Court came up with the disconcerting finding that although the arbitrators had, in fact, "plainly erred in failing to hold Concorde vicariously liable" for Jill Cody's misconduct, that error may simply have been the byproduct of the arbitrators' expediency in not fully considering the ramifications of its judgment.

Yeah, I know, that sounds absurd. Frankly, I'm not going to argue against your conclusion because it's also mine.

In any event, the DMA Memorandum found that:

The panel issued the equivalent of a default judgment against Jill Cody after she failed to respond to the statement of claim or appear at the hearing. Given the clear applicability of respondeat superior, the panel denied relief against Concorde either because it chose not to apply the law or because it did not consider the ramifications of its default judgment. The former explanation would constitute manifest disregard of the law. The latter would not.

Ebbe has failed to meet his burden of demonstrating that the former explanation is more likely than the latter. The arbitration award, devoid of any reasoning, provides no help. Neither Ebbe's statement of claim nor Concorde's answer mentions common law respondeat superior. Ebbe has not submitted any briefing provided to the arbitrators before or after the hearing. He does not point to any statements by the arbitrators during the four-day hearing that show they recognized the applicability of respondeat superior to Jill Cody and Concorde's employment relationship but chose to disregard it. While Ebbe's attorney did mention once (in a conclusory fashion) that Concorde should be held vicariously liable for Jill Cody's conduct, this one reference during a four-day hearing does not persuade the Court that the arbitrators expressly chose to ignore Concorde's vicarious liability. More likely, the arbitrators entered a default judgment against Jill Cody and, giving little thought to matter, failed to consider the consequences for Concorde's liability. Accordingly, while the arbitrators plainly erred in failing to hold Concorde vicariously liable for Jill Cody's misconduct, they did not act in manifest disregard of the law.

http://brokeandbroker.com/PDF/EbbeOp1Cir200324.pdf In affirming DMA, the 1Cir largely echoed the lower court's finding that the arbitrators' Award was reasonable in light of the claims made and the evidence presented, and that Ebbe had not met his burden of proof concerning manifest disregard of the law. In rejecting Ebbe's principal argument that the arbitrators had manifestly disregarded the law because Concorde employee Jill Cody was found jointly and severally liable with her husband Richard Cody -- and, as such, Concorde must be liable via respondeat superior -- 1Cir finds that:

[N]either of the Codys appeared for arbitration, and the judgment of the arbitrators was entered while they were in default. The panel's finding of liability against the Codys could reasonably have been nothing more than entry of a default judgment. Further, Ebbe produced no evidence of misconduct, including any violations of company rules, by Jill Cody while she was his representative. The panel's reasons for not awarding the measure of damages Ebbe requested could well reflect rejection of some of Ebbe's claims, including that any liability on the Codys' part should be attributed to Concorde.

Bill Singer's Comment

As to the career arc of Richard Cody, consider that the SEC barred him in various capacities. In the Matter of Richard G. Cody, Respondent (Order Instituting Administrative Proceedings and Making Findings and Imposing Remedial Sanctions, '34 Act Rel. No. 85355; Invest. Adv. Act Rel. No. 5203; Admin. Proc. File No. 3-19113 / March 19, 2019)https://www.sec.gov/litigation/admin/2019/34-85355.pdf

In imposing various Bars, the SEC Order notes that:

1. From May 2005 through March 2010, Cody was an associated person of an
investment adviser registered with the Commission. From March 2010 through August 2016, Cody
was an associated person of and a registered representative associated with several dually-registered
investment advisers and broker-dealers. Cody, 45 years old, resided in Massachusetts and New
Jersey during the relevant time period.

2. On November 9, 2018, Cody pled guilty to one count of investment adviser fraud
in violation of Title 15 United States Code, Sections 80b-6 and 80b-17, and two counts of
making a false declaration in violation of Title 18 United States Code, Section 1623(a), before
the United States District Court for the District of Massachusetts in United States v. Richard G.
Cody, Case No. 1:17-cr-10291-FDS.

3. The counts of the criminal information to which Cody pled guilty alleged, inter
alia, that from around May 2005 to August 2016, Cody defrauded clients by falsely assuring
them that their retirement savings were secure when he knew they were not. In fact, by some
time in 2014 their retirement savings were substantially diminished. In order to conceal the
losses, Cody provided the clients with fraudulent account statements and tax documents. The
criminal information also charged that Cody made materially misleading statements to the
Commission staff in a March 29, 2017 deposition in connection with a civil action filed by the
Commission arising from the same conduct.

I am reminded of the scene in Dicken's "The Adventures of Oliver Twist" where a certain Mrs. Bumble was involved in the theft of a certain locket and a certain ring. Somehow, Mrs. Bumble's husband got dragged into the criminal case. As is noted in the famous passage:

"It was all Mrs. Bumble. She would do it," urged Mr. Bumble; first looking round to ascertain that his partner had left the room.

"That is no excuse," replied Mr. Brownlow. "You were present on the occasion of the destruction of these trinkets, and indeed, are the more guilty of the two, in the eye of the law; for the law supposes that your wife acts under your direction."

"If the law supposes that," said Mr. Bumble, squeezing his hat emphatically in both hands, "the law is a ass -- a idiot. If that's the eye of the the law, the law's a bachelor; and the worst I wish the law is, that his eye may be opened by experience -- by experience."

Indeed, at times, the law is an ass. Ass or not, the jurisprudence is clearly on the District and Circuit Courts' side because precedent does, in fact, require that in order to "disregard" a given law, arbitrators must be shown to have known said law existed in the first place. Hey -- don't argue with me; I'm just telling you what the folks in robes sitting on the bench have been saying is the law for generations and generations. We lawyers call that precedent. Sometimes, like Mr. Bumble, we lawyers call it something else.

Sadly, Mr. Ebbe seems to been victimized by the Codys and the law. I imagine that what' s driving Ebbe's appeals is the unlikelihood that he's ever going to see even a half-penny from the Codys, and he's trying his best to find a deeper and hopefully filled pocket from which to realize recompense. Can't blame a victim for trying.

For me, it's almost impossible to ponder the statement below from a federal court and not walk away shaking my head and checking the calendar to see if this is the 21st and not the 19th Century:

More likely, the arbitrators entered a default judgment against Jill Cody and, giving little thought to matter, failed to consider the consequences for Concorde's liability. Accordingly, while the arbitrators plainly erred in failing to hold Concorde vicariously liable for Jill Cody's misconduct, they did not act in manifest disregard of the law.

BILL SINGER is a lawyer who represents securities-industry firms, individual registered persons, Wall Street whistleblowers, and defrauded public investors. For over three decades, Singer has represented clients before the American Stock Exchange, the New York Stock Exchange, the Financial Industry Regulatory Authority (formerly the NASD), the United States Securities and Exchange Commission, and in criminal investigations brought by various federal, state, and local prosecutors. He has the distinction of representing witnesses during Congressional investigations. In 2015, Singer achieved a significant award in excess of $1 million from the Securities and Exchange Commission on behalf of a whistleblower client.

Singer is presently Of Counsel to a law firm and the publisher of the Securities Industry Commentator feed and the BrokeAndBroker.com Blog, which was rated as one of the industry's top eight destination websites and the leading legal/regulatory blog by "Investment News."

Before entering the private practice of law, Singer was employed in the Legal Department of Smith Barney, Harris Upham & Co.; as a regulatory attorney with both the American Stock Exchange and the NASD (now FINRA); and as a Legal Counsel to Integrated Resources Asset Management. Singer was formerly Chief Counsel to the Financial Industry Association; General Counsel to the NASD Dissidents' Grassroots Movement; and General Counsel to the Independent Broker-Dealer Association. He was registered for a number of years as a Series 7 and Series 63 stockbroker.

Singer regularly appears as a commentator on television and radio, and is frequently quoted in the press. He is an outspoken critic of ineffective regulation and an advocate for economic and political sanity.